Bitcoin Futures - Finally becoming a reality!

by Frank D. Cholly

December 7, 2017 9:11AM CST

This is without a doubt one of the most highly anticipated and talked about contracts to come along in quite some time… On Sunday December 10th, 2017 the CBOE will launch their Bitcoin futures contract. The CME will follow by launching theirs on Monday December 18th.

Exchange Traded Bitcoin Futures

While the two futures contracts offered by CBOE and CME are similar, they also have some key differences. Both contracts track the underlying Bitcoin but in two very different ways. The CBOE bitcoin (XBT) is a 1 bitcoin contract that is cash settled based on the Gemini auction price. Gemini is a US based digital asset platform that allows investors to buy, sell and hold their bitcoins. The CME bitcoin contract (BTC) size will be worth 5 bitcoins and will cash settle by reference to the CME CF Bitcoin Reference Rate (BRR). The CME created the BRR and the CME CF Bitcoin Real Time Index (BRTI) as a standardized reference rate and spot price index to aggregate global demand and order flow from major bitcoin exchanges. The current exchange’s indexes are comprised of are Bitstamp, GDAX, itBit, and Kraken. The margin requirement will be similar with the CBOE, having an exchange minimum initial margin requirement of 44% of the daily settlement price and the CME will require 35%. For example, if daily settlement was $11,500 the CBOE minimum requirement would be $5,060 and the CME would be $20,125 ($4,025 times 5 bitcoin).

Benefits of Trading Bitcoin Futures

There are many perceived benefits to trading the bitcoin futures instead of or in conjunction with the actual bitcoin. Just like other commodity/currency futures, bitcoin futures could be used as a risk management vehicle to protect downside price risk for bitcoin investors. The futures also provide added opportunities and strategies for speculators. The ability to short the market and day trade the futures in a regulated arena provides added opportunity. The fact that you can almost instantaneously buy and sell bitcoin futures not only adds potential but reduces risk in many instances. This lowers risk because many bitcoin platform take 3-5 days before the bitcoin hits your account. This means if you buy bitcoin and a big price move occurs the next day, you cannot sell it till the bitcoins arrive. This could be costly and most likely avoided in the futures. Tax treatment of futures is considerably more favorable. With Bitcoin futures, 60% of the gains are treated as long-term capital gains and 40% are treated as short-term capital gains. The amount of time you hold the contracts does not matter, this is how they are taxed. With Spot Bitcoin, anything held less than 12 months is considered short-term capital gains and taxed at whatever rate is appropriate for your tax bracket. Investors could also get exposure to bitcoin without having to create a wallet to store bitcoins. Because the exchanges allow investors to trade the futures on margin, this allows traders to be leveraged or control bitcoin without having the full value in their account. Finally, while it is rare, people have lost their bitcoins. For example, this could happen if someone steals your laptop that has your wallet on it. Your futures contract cannot be lost or stolen.

Blockchain Technology

Everybody has probably heard of bitcoin, especially recently with the volatility and record prices, but many are still less familiar with the term blockchain. Blockchain is the technology behind bitcoin. It is a digital ledger that records transactions on blocks that are transparent and permanent. When a transaction occurs it is placed in a block which is then connected to the block before it. The transactions are blocked together creating a chain, hence the term “blockchain”. Many major banks have already expressed their interest in blockchain due to the ease of tracking and auditing transactions and the potential to increase efficiency. The popularity of bitcoin has continuously increased since its creation in 2008. It was initially created to produce a currency free of any central authority that could be transferred electronically without the use of a bank. Today, bitcoin is popular both as a currency and as an investment. We are seeing a growing number of institutions now accepting bitcoin as a form of payment due to the low transactions costs, security and ease of use.

Frank has been involved in many aspects of the futures business, from taking and placing orders to providing high-quality order execution service. As a second-generation participant in markets at the Chicago Board of Trade, Frank spent his early years working in the Treasury bond pit servicing both institutional and retail clients. He then expanded his brokerage duties and began covering a wide range of markets, including stock index, metals, grains and the balance of the interest rate sector. Ultimately, he turned his full-time focus to the grain market, dealing primarily with proprietary and commercial business. Frank was a senior commodities broker at Lind-Waldock prior to joining RJO Futures in 2011.

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